Eastern Corporate Fed. Cred. v. PEAT, MARWICK, ETC., Civ. A. No. 84-2056-T.

• Decision Date: 30 July 1986
• Docket Number: Civ. A. No. 84-2056-T.
• Citation: 639 F. Supp. 1532
• Court: U.S. District Court — District of Massachusetts
• Parties: EASTERN CORPORATE FEDERAL CREDIT UNION, Plaintiff, v. PEAT, MARWICK, MITCHELL & CO., et al., Defendants.

639 F. Supp. 1532

EASTERN CORPORATE FEDERAL CREDIT UNION, Plaintiff, v. PEAT, MARWICK, MITCHELL & CO., et al., Defendants.

Civ. A. No. 84-2056-T.

United States District Court, D. Massachusetts.

July 30, 1986.

Robert J. Muldoon, Jr., Bryan G. Killian, Paul R. Gupta, Sherin & Lodgen, Boston, Mass., for plaintiff.

Robert E. Sullivan, Herrick & Smith, Boston, Mass., for defendant, Professional Asset; Ross A. Arbiter, Stan W. Levy, Weinberg, Zipser, Arbiter, Heller & Glick, Richards, Watson, Dreyfuss & Gershon, Erwin E. Adler, Los Angeles, Cal., and Gene A. Castleberry, Robert A. Wiener, Oklahoma City, Okl., of counsel.

Jessica Block, Arnold P. Messing, Margaret H. Marshall, Csaplar & Bok, Boston, Mass., for Peat, Marwick, Blanton, and York; William E. Hegarty, Mathias E. Mone, Edward P. Krugman, Cahill Gordon & Reindel, and Edwin D. Scott, Assoc. Gen. Counsel, Peat, Marwick, Mitchell & Co., New York City, of counsel.

MEMORANDUM

TAURO, District Judge.

Plaintiff, a disappointed investor in the financially troubled Penn Square Bank ("Penn Square"), seeks damages from the defendant accountants who performed an audit of the bank. Plaintiff's complaint asserts federal RICO causes of action, as well as various state law claims.

In the latter part of 1981, defendant Peat, Marwick, Mitchell & Co. ("Peat Marwick") entered into an agreement with Penn Square to perform an independent audit of that bank's financial condition as of December 31, 1981. Peat Marwick issued a report of its audit on March 19, 1982. Plaintiff alleges that Peat Marwick fraudulently or recklessly prepared and certified the Penn Square financial statements, misrepresenting and concealing the bank's true financial condition.

Plaintiff claims that Professional Assets Management, Inc. ("PAM") received the Peat Marwick opinion and audited financial statements on or about April 16, 1982. Based on these documents, PAM began recommending investments in Penn Square certificates of deposit to its clients, including plaintiff. Relying on that advice, plaintiff began investing in short-term Penn Square certificates of deposit on May 25, 1982. On July 5, 1982, the Federal Deposit Insurance Corporation ("FDIC") closed Penn Square, because it had become unable to meet its obligations. As of that date, plaintiff held Penn Square certificates of deposit totaling over $4 million in value. Plaintiff suffered a loss of approximately $2.5 million in the value of its investments, as a result of Penn Square's failure.

Plaintiff has sued Peat Marwick and 17 of its partners under civil RICO, as well as related theories alleging negligence, unfair business practices, negligent misrepresentation, breach of fiduciary duty, and fraud. At issue now is defendant's motion to dismiss.

I.

Plaintiff's only federal law causes of action arise under the Racketeer Influenced and Corrupt Organizations Act. Plaintiff has alleged violations of: 18 U.S.C. § 1962(c), prohibiting the conduct of, or participation in the conduct of, the affairs of an enterprise through a pattern of racketeering activity; § 1962(a), prohibiting the use of proceeds obtained through a pattern of racketeering activity to acquire, maintain, or control an enterprise; and § 1962(d), prohibiting conspiracy to do the above.

Defendants first contend that their activity does not meet the requirements of a "pattern of racketeering activity" under 18 U.S.C. § 1962(c).¹ Plaintiff has alleged that defendants committed multiple acts of wire and mail fraud in furtherance of a scheme to misrepresent the financial condition of Penn Square. Plaintiff lists, as predicate acts, the following: 1) Peat Marwick's mailing of the Penn Square 1981 Financial Statement and Peat Marwick unqualified audit opinion, 2) Peat Marwick's mailing of its Management Report regarding the Penn Square audit engagement, and 3) Penn Square's telephone call to PAM relating the fact that Peat Marwick issued an unqualified audit report.

As a matter of statutory definition, a "pattern" must be established by "at least two acts of racketeering activity." 18 U.S.C. § 1961(5). Racketeering activity is defined to include "any act which is indictable" under, among other sections, 18 U.S.C. §§ 1341 or 1343, relating to mail and wire fraud. Thus, under one interpretation of the statute, it is possible for a single fraudulent or criminal transaction, effected through two or more acts of mail or wire fraud, to satisfy the civil RICO requirement of a pattern of racketeering activity.

The legislative history of RICO makes clear, however, that Congress did not intend the statute to apply to isolated acts of fraud or criminal activity. "The concept of `pattern' is essential to the operation of the statute.... The target of RICO is thus not sporadic activity." S.Rep. 91-617, 91st Cong., 1st Sess. 158. In applying civil RICO, therefore, it is essential to identify threats of continuing criminal activity, as opposed to isolated criminal events. It is particularly difficult to make that identification where the predicate acts alleged are those of wire or mail fraud. Multiple acts of wire or mail fraud are frequently required to implement "sporadic activity."

The Supreme Court has recently addressed the question of what constitutes a pattern of racketeering activity:

... The definition of a "pattern of racketeering activity" differs from other provisions in § 1961 in that it states that a pattern "requires at least two acts of racketeering activity," § 1962(5) (emphasis added), not that it "means" two such acts. The implication is that while two such acts are necessary, they might not be sufficient. Indeed, in common parlance two of anything do not generally form a "pattern." The legislative history supports the view that two isolated acts of racketeering activity do not constitute a pattern. As the Senate Report explained: "The target of RICO is thus not sporadic activity. The infiltration of legitimate business normally requires more than one `racketeering activity' and the threat of continuing activity to be effective. It is this factor of continuity plus relationship which combines to produce a pattern." S.Rep. No. 91-617, at 158 (1969) (emphasis added).

Sedima, S.P.R.L. v. Imrex Co., ___ U.S. ___, 105 S.Ct. 3275, 3285 n. 14, 87 L.Ed.2d 346, 53 U.S.L.W. 5034, 5038 n. 14 (1985). The Court noted that the "extraordinary uses" of civil RICO are primarily due to the breadth of the predicate offenses, "in particular the inclusion of wire, mail, and securities fraud," and to the "failure of Congress and the courts to develop a meaningful concept of `pattern'." Id. 105 S.Ct. at 3285.

A number of lower courts have utilized this reasoning to distinguish repeated criminal activity from multiple acts used to carry out a single criminal transaction — particularly where the predicate acts alleged involve mail fraud, wire fraud, or securities fraud. See, e.g., Superior Oil Co. v. Fulmer, 785 F.2d 252, 257 (8th Cir. 1986) (conversion or theft of gas from pipeline, accomplished through several related acts of mail and wire fraud, was a single fraudulent scheme and failed to establish a pattern for purposes of RICO); Allright Missouri Inc. v. Billeter, 631 F.Supp. 1328 (E.D.Mo.1986) (multiple acts of wire fraud underlying alleged violations of federal securities laws, undertaken in connection with one real estate transfer, does not constitute a pattern under RICO); Dunham v. Independence Bank of Chicago, 629 F.Supp. 983 (N.D.Ill.1986) (repeated mailings of the same misleading statement, inducing a series of expenditures by the victim, is not a RICO pattern); District Telecommunications Development Corp. v. District Cablevision, Inc., 638 F.Supp. 418 (D.D.C. November 27, 1985) (four mailings to a person other than plaintiff, as part of a single effort to defraud, is not a RICO pattern).

The reasoning behind this line of cases is evident and compelling. It defies logic to rule that a fraudulent securities scheme, perpetrated by a single mailing, is nothing more than garden-variety crime, but that the same scheme would have been a RICO violation if two or three mailings had been used. Such an approach would have the effect of including most fraudulent schemes under the RICO umbrella. In today's integrated interstate economy, it is the rare transaction that does not somehow rely on extensive use of the mails or the telephone.

Indeed, it is virtually impossible to imagine a case of securities fraud that would not involve two or more mailings or telephone calls. A ruling that one act of fraud, implemented by two or more mailings or telephone calls, constitutes a RICO "pattern of racketeering activity" would convert almost every securities case into a RICO claim, with attendant possibilities for triple damages. That was not the intent of Congress.

Rather, the provisions of RICO mandate that courts distinguish between a criminal episode, implemented through a number of acts of mail or wire fraud, and criminal conduct that is in the nature of a continuing activity. In addressing that responsibility, district courts have generally followed one of two approaches. Some have ruled that one fraudulent scheme, implemented through separate acts of mail or wire fraud, cannot be a pattern of racketeering activity. See, e.g., Superior Oil Co. v. Fulmer, 785 F.2d 252, 257 (8th Cir. 1986) (one scheme, involving multiple predicate acts, was not a pattern of racketeering activity); Northern Trust Bank/O'Hare v. Inryco, Inc., 615 F.Supp. 828, 833 (N.D.Ill. 1985) (single alleged scheme of paying construction kickbacks, even if carried out through five mailings, did not form a pattern under RICO); Fleet Management Systems v. Archer-Daniels-Midland Co., 627 F.Supp. 550 (C.D.Ill.1986) (scheme to illegally market a computer program, carried out through eight fraudulent acts over a two year period, was not a RICO pattern). In effect, these courts would require at least two fraudulent schemes to...